Wellington+total international

[ejman]

I'm right with you on this. I'm an index investor who believes in "set an AA and rebalance, don't time the market." But the bond prices now seem to offer so little upside and such a large potential downside that I would have a hard time investing in the "normal" %age of bonds for my portfolio. IMO, given the present low bond yields, there's just not much wrong with doing a few things to mitigate the potential problem:
1) Favor bonds with relatively short duration
2) Cut back on bonds and increase the allocation to cash (CDs, etc). Use the cash to dollar-cost average back into bonds as interest rates rise and bond prices get pounded.

That doesn't mean that I'd totally abandon intermediate term bonds, but I wouldn't like to see 50% of my portfolio in them. And, while I'm sure the managers at Wellington are some of the best in the business, I don't think they'll be successful in swimming against the stream of lower bond prices when the time of reckoning comes.

When the Fed gets its thumb off the scale and stops suppressing interest rates, I'd be likely to resume my "efficient market" ways of doing business.

Just my opinion.

Would you still follow this approach if we were to go into a decades long low/no growth low interest rate environment (AKA Japan)? http://www.tradingeconomics.com/japan/interest-rate

 

[samclem]

I cashed in an income account so they are just sending that money to me to do with as I wish. Just need to wait for 7-10 days or so I am told now until things get transferred. He will give me a call at that time to double check to see if the Wellington is where I really want to put it.

Be sure to follow up on this. Call him if he doesn't call you. Doing this all by phone is a great way for your EJ rep to string it out over time, for him to re-engage you with new ideas, etc. You've got nothing in writing, so, well, he's got every reason to slow this down to give you a chance to "reconsider." In some cases it can take a registered letter from you to make it happen.

I will end up with around $25k of gains that I will be hit with at the end of the year....but I am still well under the $72k threshold for moving up to the 25% bracket so I figured I would just take the hit this year and get it over with.

If you can stay in the 15% bracket there won't be a hit at all, the cap gain taxes will be zero. This will be a great move, and better to do it now while all the gains can be taken at 0%.

 

[samclem]

Would you still follow this approach if we were to go into a decades long low/no growth low interest rate environment (AKA Japan)? Japan Interest Rate

No, I'd invest all my money in an economy that was still going to grow. That's what every Japanese investor blessed with prescience should have done.

But nobody has that, or a working crystal ball.

 

[F4mandolin]

Oh God....don't even mention Japan (lived in Okinawa for 5 years...nice).

My needs are simple.....and if I only had hindsight things would be great.

1. I have enough cash/bonds coming due to get us through 3 years easy...possibly 4. So the money I am talking about will sit for 4 years before I even need to think about grabbing any.
2. In my opinion....bonds will be unraveling in 6-12 months, possibly a little longer if % rates stay really low.
3. A minimum of 60% stocks....probably pushing towards 70% at this time.
4. Total is approx $290K, $53k of that is in the ROTH.
5. Minimum # of funds. That's why I was looking at the Wellington so hard. Not a perfect fund.....but pretty damn decent.

The usual "lazy" portfolio of 1/3 Total Stocks/Bonds/International doesn't seem to be the way to go "at this time". Wellington was a good way for someone like me (wimpy/chicken/indecisive) to get into the game with the minimum of fuss. The plan will come together....I just need to suck it up..

 

[ejman]

Oh God....don't even mention Japan (lived in Okinawa for 5 years...nice).

My needs are simple.....and if I only had hindsight things would be great.

1. I have enough cash/bonds coming due to get us through 3 years easy...possibly 4. So the money I am talking about will sit for 4 years before I even need to think about grabbing any.
2. In my opinion....bonds will be unraveling in 6-12 months, possibly a little longer if % rates stay really low.
3. A minimum of 60% stocks....probably pushing towards 70% at this time.
4. Total is approx $290K, $53k of that is in the ROTH.
5. Minimum # of funds. That's why I was looking at the Wellington so hard. Not a perfect fund.....but pretty damn decent.

The usual "lazy" portfolio of 1/3 Total Stocks/Bonds/International doesn't seem to be the way to go "at this time". Wellington was a good way for someone like me (wimpy/chicken/indecisive) to get into the game with the minimum of fuss. The plan will come together....I just need to suck it up..

I don't know if this helps...hope it doesn't hurt as the future is unknowable. FWIW I started investing in 1987. Used many (dozens) of funds and sliced and diced to where my eyes crossed. I was fortunately able to ER at age 52 at the end of 2002. Much as I would like to claim some sort of investment prowess on my part for my ER success the stark fact of the matter is that my annual investment return since 1/1/87 to last Friday is 7.6%. A tracking investment in Welleslley/Wellington since that time would have resulted in a return of roughly 8.5% with a much simpler life in between. Who knows if the future will resemble the past. With the caveat that I wouldn't put all my eggs in one basket I think that an investor would in all probability be well served by Wellington (Or Welleslley for that matter for a more conservative investor)

 

[F4mandolin]

Much as I would like to claim some sort of investment prowess on my part for my ER success the stark fact of the matter is that my annual investment return since 1/1/87 to last Friday is 7.6%. A tracking investment in Welleslley/Wellington since that time would have resulted in a return of roughly 8.5% with a much simpler life in between. Who knows if the future will resemble the past. With the caveat that I wouldn't put all my eggs in one basket I think that an investor would in all probability be well served by Wellington (Or Welleslley for that matter for a more conservative investor)

When checking just the last 10 years....Wellington is ahead of Total Stock/Bond. I just had a few beers.....doesn't help, but I'm not twitching as much. Like I said....I will likely waver a couple more times in the next week....but I think Wellington will be in the mix...whether in a big way or not is to be seen. I do like things simple.

 

[nun]

When checking just the last 10 years....Wellington is ahead of Total Stock/Bond. I just had a few beers.....doesn't help, but I'm not twitching as much. Like I said....I will likely waver a couple more times in the next week....but I think Wellington will be in the mix...whether in a big way or not is to be seen. I do like things simple.

I was just out with friends for a few beers and sat through a discussion on "portable alpha". urrgh. You seem to be wavering because of the current bond market and economy.....what's your time horizon? You know what's happening now, might have an idea what the trend is for the next 6 months to a year, but past that who knows? Set your AA, diversify, put enough into cash/CDs and short term bonds to cover a 4 year down turn and stop thinking about it so much.

 

[nun]

The usual "lazy" portfolio of 1/3 Total Stocks/Bonds/International doesn't seem to be the way to go "at this time".

Why not? you might want to shorten the bond duration, or reduce the international percentage, but the general formulation seems ok to me if you intend to avoid active trading and just rebalance.

 

[F4mandolin]

The three main funds ARE just fine....if we were just plodding along in a "normal" economy. I am one of those people who doesn't believe in re-balancing on a certain day (or every six months/year etc with no exceptions). That only works to me if you have a "normal" economy. I plan on re-balancing that way IF things are normal....but if I just re-balanced after (example) 6 months and then 3 months later the S+P is up 200....likely re-balance then. Yep....guess that's called market timing. Right now I do not think that just throwing 1/3 of my money into "regular" Total Bonds is the right thing to do. Could I be wrong?.....every day. Now....might I consider short term bonds? yes. I am throwing no choices out at this time....other than keeping things simple.

It is kind of strange though.....both in these finance decisions....and in politics...each side is absolutely convinced that they have things the right way and the other person is absolutely wrong.....and about 50% of the time they seem to be wrong. I am a little scared of Total Bonds right now....am I right? I "think" so. Not positive though....or I would make a decision based on that. Oh well....heading to the beach for 5 days.

 

[nun]

The three main funds ARE just fine....if we were just plodding along in a "normal" economy. I am one of those people who doesn't believe in re-balancing on a certain day (or every six months/year etc with no exceptions). That only works to me if you have a "normal" economy. I plan on re-balancing that way IF things are normal....but if I just re-balanced after (example) 6 months and then 3 months later the S+P is up 200....likely re-balance then. Yep....guess that's called market timing. Right now I do not think that just throwing 1/3 of my money into "regular" Total Bonds is the right thing to do. Could I be wrong?.....every day. Now....might I consider short term bonds? yes. I am throwing no choices out at this time....other than keeping things simple.

FYI I rebalance if any component of my AA is off by 5% or more.

I think that you might have enjoyed my conversation about "portable alpha".

Part of the reason to set an AA and to rebalance at certain points is to overcome the paralysis you are currently facing. You are looking at the market and trying to predict the future and hoping to get in at the "right time" with the right AA. The most I'd go down that path would be to have a over all bond allocation with duration of 5 years or less and to have a bit more in cash/CDs if you are worried about interest rates going up.

 

[Huston55]

No, I'd invest all my money in an economy that was still going to grow. That's what every Japanese investor blessed with prescience should have done.

But nobody has that, or a working crystal ball.

Exactly, which is one reason to be more heavily weighted in foreign stock markets. So, from an overall AA standpoint, I'd have more foreign exposure than the ~10% provided by Wellington.

 

[samclem]

Part of the reason to set an AA and to rebalance at certain points is to overcome the paralysis you are currently facing. You are looking at the market and trying to predict the future and hoping to get in at the "right time" with the right AA. The most I'd go down that path would be to have a over all bond allocation with duration of 5 years or less and to have a bit more in cash/CDs if you are worried about interest rates going up.

+1. Nun and I differ slightly in how much foreign we'd hold, or whether to tilt toward small and value, or whether to hold cash vs bonds right now, but those are relatively small issues. I rebalance once per year and do not even look at things the rest of the time. Sure, the AA might get a bit out of whack, but even that has been shown not to hurt returns at all (it just increases the portfolio's volatility).

If anyone thinks they can figure out what stocks are going to do next by what has just happened, they should really become an options trader. After all, he'd only have to be right slightly more than chance would dictate and he could become fabulously wealthy in short order due to he leverage involved. Or, just be right, say, five times in a row and go all in. How come folks aren't doing this regularly and becoming wealthy? Because it's very, very unlikely to be successful.

 

[F4mandolin]

OK....back from the beach....still twitching. Can someone tell me what would happen (in detail) if interest rates rise....and the effect on the Wellington. Right now I am leaning towards 45%+ with the Total Stock and 25% on International.....30% or so with short term bonds. I could even go a little higher on the stocks.....the bonds I can stick on the short terms for a while. We have up to 4 years cash at this time so I can live through a few market twitches in the near term......my wife kind of likes the fact that the Wellington has such a long term positive opinion over the years. Wellesley has way toooo many bonds at this time...probably.

Still waiting for Vanguard to get back to me on the switch. Still thinking I could go 75% stocks with a bunch of cash for a year or so. The good side....it is a good weekend for clams at the beach. Clams.....not a lover in my case.

 

[F4mandolin]

prof12- Hopefully will be finishing up tomorrow (Friday) with most of the transfer. Been a little bit slower than anticipated. So far the help has been fine while on the phone with Vanguard. As a side note.....I had posted on the Boglehead site as well and had a guy take my info and gave me a few pretty easy to see portfolio combinations that I really liked. See below. I am likely to use option 4.

Total = $794,599

Option 1 -Here's sort of a standard Boglehead portfolio idea at 60/40 with 20% of stock (12% of portfolio) in international.

Bonds and CDs 7% ($55,599)
$18,233 Wachovia Mortgage Due Maturity Date=08/15/2013 CD rate=5.050%
$18,824 Hewlett Packard CO Global Note -corporate- Maturity Date 03/01/2014 rate=6.125%
$18,542 Citigroup Inc Senior Note Unsecured- corporate- Maturity Date 03/02/2015 rate=2.650 %

Taxable at Vanguard 32.7% ($260,000)
20.7% Vanguard Total Stock Market
12% Vanguard Total International Index

Roth IRA at Vanguard 6.7% ($53,000)
6.7% Vanguard Total Stock Market

TSP 53.6% ($426,000)
15.6% C Fund
5% S Fund
13% F Fund
20% G Fund

This is a basic market weight portfolio. It is tax efficient and low cost. As you spend the bonds and CDs, you would adjust your stock to bond ratio in the TSP.


Option 2

Bonds and CDs 7% ($55,599)
$18,233 Wachovia Mortgage Due Maturity Date=08/15/2013 CD rate=5.050%
$18,824 Hewlett Packard CO Global Note -corporate- Maturity Date 03/01/2014 rate=6.125%
$18,542 Citigroup Inc Senior Note Unsecured- corporate- Maturity Date 03/02/2015 rate=2.650 %

Taxable at Vanguard 32.7% ($260,000)
Target 2020 (63% stocks/36% bonds)

Roth IRA at Vanguard 6.7% ($53,000)
Target 2020 (63% stocks/36% bonds)

TSP 53.6% ($426,000)
53.6% L 2020 (53% stocks/47% bonds)

Quick math shows this is about 56% stock and 46% bonds and it would migrate to more bonds over time. This idea is easy, but not particularly tax-efficient. I'm not sure how much that matters if you are spending the dividends from the taxable account.

Option 3 - same as above except using LifeStrategy ModeratevGrowth (60/40) instead of the Target 2020. Quickie math = 52% stocks/48% bonds. Same pros and cons. Will migrate slower than option 2 toward more bonds.

Option 4 - use automatic funds for TSP and Roth IRA, individual funds for taxable.

Taxable total = $315,599

Bonds and CDs ($55,599)
$18,233 Wachovia Mortgage Due Maturity Date=08/15/2013 CD rate=5.050%
$18,824 Hewlett Packard CO Global Note -corporate- Maturity Date 03/01/2014 rate=6.125%
$18,542 Citigroup Inc Senior Note Unsecured- corporate- Maturity Date 03/02/2015 rate=2.650 %

Taxable at Vanguard ($260,000)
$156,489 Vanguard Total Stock Index
32,871 Vanguard Total International Index
$70,640 Intermediate term tax exempt bonds


Roth IRA at Vanguard 6.7% ($53,000)
LifeStrategy Moderate Growth (60/40)

TSP 53.6% ($426,000)
L 2020 (53/47) or mix about half and half with L2030 to get 60/40

Pros - this is easy - you'd only have to rebalance the taxable account and you could do that once a year. The Roth IRA and TSP would take care of themselves. The downside of this is that the international fund in the TSP is incomplete (missing emerging markets, Canada, and small caps). This is not a fatal flaw, just a shortcoming.

Obviously, there are other similar options that would use Wellington.

 

[nun]

I'd avoid Life Strategy or Target Date funds as the ERs are higher than the fund they contain. Stick with the core Vanguard funds as they have the lowest fees and you can easily mimic any LifeStrategy etc fund simply by looking at what those fund buy.

 

[F4mandolin]

Nun...yeah, I have thought of that....it would cost maybe $300 a year extra on the Vanguard money...unless there is more trading activity with those funds. $300 is not a lot....but I would rather have it than not of course. His first two options were the ones I liked.....the first was more of the way you are talking about, the 4th was for urge for a simpler method. I have a tendency to want to stay away from the G fund in the TSP since it doesn't give much return (but doesn't lose at all), although it will make a bit of a comeback when % rates tick back up. Oh well......golfing this morning....gives me a last chance to mull things over.

Don't know why I didn't notice option 1 more now that I am thinking of it.....he has a lot of my bond action moved to the TSP which would likely be a better place for the bonds wouldn't it?

 

[eytonxav]

Remember, bonds are designed to be the ballast part of your portfolio, and aside from avoiding long term ones given where interest rates are today, should continue to play an important role in protecting your port against what a horrible bear market can do to you on the equity side. Given the current rate environment, I would keep durations short < 4 years and diversify your bond/fixed income holdings and increase your cash more than normal (eg 10%+). All these bond bubble headlines and discussions suggesting an imminent slaughter with interest rates likely to shoot up like they did in the late 70s/early 80s may very well be a falicy or at least overstated for headline purposes.